Unit 11

Distribution ManagementBook Code MB0046

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Contents • Introduction• Need for marketing channels• Decisions involved in setting up the channel• Channel management strategies• Introduction to logistics management• Introduction to retailing• Wholesaling

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Introduction • Distribution is the transfer of goods or services from

the factory to the consumer.• It is a source of strategic advantage to the company

in this highly competitive world.• Customers these days don’t wait for the product.

Companies should make the products available as and when the customer demands.

• This has become a challenge for the organizations to provide right product, at the right place, at the right time.

• Companies are focusing on reducing the cost in the supply chain.

• To reduce cost, companies are combining distribution system with information technology, outsourcing the distribution systems and making the supply chain simple and efficient.

• Distribution has become one of the important parts of the marketing planning.

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Learning Objectives After studying this unit, you will be able to• Explain the nature and functions of

marketing channels.• Analyze the decisions involved in the

distribution management.• Evaluate the different distribution strategies

adopted by the company.• Understand the importance of logistics

management.• Discuss the growth and scope of retailing and

wholesaling.

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Need for Marketing Channels• Marketing channels are organizations that are involved in distribution of goods

and services from factory to the consumer at the right time and right place. • Marketing channels include retailers, wholesalers, agents, brokers, etc.• Some companies don’t use these channels. They sell their products directly to

consumers.• For example, Dell computers asks its customers to login to the website, configure

their product and order it on the internet.• The question that needs to be answered is why some companies use marketing

channels and some do not.• For this it is important to understand the functions of marketing channels and how

they are more advantageous than direct marketing.

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Functions of marketing channels1. Physical distribution: Transporting and storing goods.2. Communication: Marketing intermediaries (Mediaters) promote the company’s

products. The channel members provide the information about the products to the customers.

3. Information: Retailers and wholesalers collect the information from the customer and provide it to the company.

4. Title transforming: Marketing intermediaries purchase the goods from the company and change the ownership of the goods to the next intermediary or the customer.

5. Relationship management: The marketing intermediaries try to understand the needs of the customers and try to satisfy his needs.

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Decisions Involved in Setting up a Channel• Marketers should consider many factors before deciding the type of channel. • To decide on the channel marketer will take following decisions:

1. Understanding the customer profile: Purchasing habits are different from person to person. People who do not have time would like to purchase on the net while people who have lot of time would like to enjoy the shopping. Some prefer variety while some want unique specialized products. Hence, marketers should understand who his customers are and how they purchase their products.

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2. Determine the objective on which the channel is to be developed:

a) Reach: If the company wants to make the goods available at most of the retail outlets, it will use intensive distribution channel.

b) Profitability: Company wants to reduce the cost of the channel and improve its profitability. It will reorganize the channel to the maximum level to reduce the cost and increase the profit.

c) Differentiation: Company positions its product differently. When most of the players in the industry follow traditional system, the company wants to adopt new format of channels. For example, all computer manufacturers were adopting dealer retailer channel to sell their products while Dell started selling its products on the internet.

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3. Identify type of channel members• After setting the objectives, the company decides the type of channels

most suited to it. • The intermediaries involved in the distribution are merchants, agents

and resellers.• Merchants are those who buy the product, take ownership of it and

resell the product.• Agents are people who find the customers and negotiate with them but

do not take ownership of the product.• Facilitators are the people who help in distribution but do not negotiate

or take ownership of the product.

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4. Determining intensity of distribution• Intensity of distribution means how many middlemen will be used at

the wholesale and retail levels in a particular territory.• If the number of intermediaries are more than what is required, the

cost of the channel will increase.• If the number of intermediaries are less than what is required, the

company will not be able to meet all target customers.• Therefore there should be optimum number of intermediaries.• On the basis of number of intermediaries required, the company can

adopt any of the following strategies:a) Intensive distribution: It is a strategy in which the company makes its

goods available at large number of outlets. The aim is to make the goods available near to the customer. For example, Parle G biscuits are available at almost all retail outlets in rural and urban areas.

b) Selective distribution: This is a strategy in which the company makes its goods available at a limited number of retail outlets. For example TVs are sold at selected retail outlets.

c) Exclusive distribution: In this strategy, marketers give exclusive rights to limited number of dealers to distribute its products.

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5. Assigning the responsibility to channel members• Company should define the area or territory in which the channel

member should work, at what price he should sell, services he should perform, and how he should sell.

• Selecting the criteria to evaluate the channel member• Company has many channel alternatives i.e. channels to choose from. It

chooses that alternative which meets its objectives. Channels can be evaluated in design phase by the method called SCPCA.

a) Sales (S): It is the ability of each channel member to increase the sales for a company.

b) Cost (C): It is the cost incurred on a channel alternative. c) Profitability (P): All the channel members available to a company are

compared for profitability. Channel with better profitability is selected.d) Control (C): Every company wants better control over its channel members.

All channels are evaluated on the basis of how much control each channel member wants and how much control the company wants to provide.

e) Adaptability (A): Due to heavy competition, companies are forced to have a regular look at their practices and supply chain. The channel alternatives should be flexible to adjust according to the needs of the changing requirements.

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Channel Management Strategies

• The selected channel should be managed properly, motivated and evaluated against set standards.

• Managing and motivating channel member• Companies now-a-days consider their channel members as partners.• Companies are asking its intermediaries to combine the business with the

company.• Combined business reduces cost, increases efficiency and helps in better customer

service. • Companies are also using Partner Relationship Management (PRM) software to

add value to their supply chain.

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Introduction to Logistics Management• In modern marketing, the study of movement of goods (logistics management) is

very important. • “Logistics management is defined as the tasks involved in planning, implementing,

and controlling the physical flow of materials, final goods and related information from points or origin to points of consumption to meet customer requirements at a profit.” --- Philip Kotler

• Inbound logistics means moving the products and materials from suppliers to the factory.

• Outbound logistics means moving the product from the factory to the resellers and customers.

• The study of suppliers and reverse distribution (return the products to factory) is now a days known as supply chain management.

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Major logistics functionsa) Warehousing• Goods produced at the factory cannot be consumed at the same time.• Companies have to store goods for future use.• Companies that have proper warehousing facilities have better operation efficiency.• Many companies are assigning this task to specialized players in warehousing

industry.• Warehousing has become a separate industry.• Barista, a coffee chain company used the services of Safe Express (Logistics

company) to improve its competitiveness.

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b) Inventory management• Organizations need to store goods required for day to day working.• Organizations do not want to have very high inventory because stock increases and hence

cost also increases.• Organizations do not want less inventory because they are not sure of the changes in

demand and its effect on the inventory.• For example, Safe Express which provides inventory solutions to Barista, replaces the goods

daily so that Barista can maintain zero inventory at their outlets.

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c) Transportation• Goods have to be carried from one place to another.• Transporters carry the goods from supplier location to the factory

and from factory to the customer.• The different modes of transportation used are:

i. Air transportation: This mode of transport is used to carry perishable goods. The characteristics of this mode are quick delivery, premium pricing and limited quantity transportation.

ii. Water transportation: It is the slowest but most cost effective mode of transportation. It is used for heavy, low value non perishable goods.

iii. Surface transportation: It is land transportation. It consists of two modes road (highway) transportation and rail transportation. It can carry wide range of products. Rail transportation is used to carry large products while road transport is used to carry high value goods.

iv. Pipelines: This mode of transportation has very few hurdles. It can be used to carry very limited variety of products and covers limited geographical area. The cost of transportation is very low. It can be used to transport oil and natural gas.

v. Internet carriers: This mode is used to carry digital products from producer to consumer with the help of satellite enabled modem or telephone wires. Software companies and educational institutions are using this mode of transport.

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Introduction to Retailing• The retail sector has grown very fast in the last few years. • This has happened due to change in consumer profile and demographics, increase

in the number of international brands available in the Indian market, economic results of the Government, increase in urbanization, availability of credit, improvement in infrastructure, large investments in technology and real estate.

• Retail is one of the fastest growing sectors in the country and India ranks 1st , ahead of Russia, in terms of emerging markets’ potential in retail.

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Characteristics of retailingi. Direct interaction with customer: Retailer is the final link between company and

the consumer. Retail understands the needs of the customer and provides solution to his problems.

ii. Purchased in small quantity: Customers purchase small quantity of goods from the retail store. But the frequency of purchasing is high. There is a better relationship between the customer and the retailer.

iii. Tool of marketing communication: Companies use the location of the retailer for displays. They also encourage the retailer to promote the product through word of mouth communication.

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Functions of retailingi. Sorting: Retailer arranges the items in proper

order so that customer can easily find his goods or services.

ii. Breaking bulk: It is the process of opening the big packets into small packets. Retailers do this because customer may not want to or be able to purchase large quantity of goods or services.

iii. Holding stock: Retailer stores the goods of organizations to fulfill the day to day needs of the customers.

iv. Channels of communication: The retailer promotes the company’s products through word of mouth communication. The location of the retailer is also used as point of display.

v. Transportation: Retailer accepts door delivery order for durable goods. Now, this facility is also provided by small grocery stores. 19

Types of retailing• Store retailing: It is a mode of retailing in which a store is necessary

at a particular place to do business. The various formats of store retailing are

1. Specialty stores: These are stores where the amount of products is large but the product line is limited like textile or furniture store. For example, Tanishq a jewellery retail store.

2. Department store: In this retail format, apparels, home furnishings and consumable goods and services are sold. For example, Shoppers Stop of Raheja Group, Webside, pantaloons and lifestyle.

3. Supermarkets: According to Philip Kotler, “Supermarkets are a relatively large, low cost, low margin, high volume, self service operation designed to serve the consumer’s total needs for food and household products. For example, Food World and Trinetra.

4. Convenience store: These stores are near to the customer residence. They carry day to day products of high turn over at premium price. For example, Reliance Fresh.

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5. Discount store: These stores sell products at low prices with low margin. The store get its profit from high volumes. For example, Subhiksha and Big Bazar.

6. Off price retailers: These retailers buy goods at less than wholesale prices and sell these goods at less than retail prices. For example, factory outlets in Marathahalli, Bangalore.

7. Super stores: These are very large stores where customer can purchase food and non food products. The super store carries large number of products in a particular category. For example, Nalli sarees which carry a large variety of sarees.

• Non store retailing: This is a mode of retailing in which the company uses electronic media or direct selling medium to sell their products. For example, direct selling, telemarketing, automatic vending, online retailing and direct marketing.

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Wholesaling • According to Philip Kotler wholesaling is ‘All activities involved in selling

goods and services to those buying for resale or business use’.• Wholesaling in India has changed rapidly.• There is a wide range of product categories – shoes, animal feed, color

TVs, electrical equipments, hardware for doors and windows, etc.

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Functions of wholesaler1. Selling: Wholesalers have clear network of retailers. Hence, they can

sell the companies products in large areas.2. Bulk breaking: Wholesalers buy the product in large quantities and

send in small quantity to retailers.3. Warehousing: Wholesalers have large space to store the goods. They

help in reducing the inventory cost to the company.4. Transportation: Some companies have agreements with wholesalers

on transporting the goods to retailers.5. Credit and risk taking: Wholesalers provide credit to the retailers. They

take the risk of finance and products also.6. Information: Wholesalers provide information to the company about

retailers’ purchase and retail market characteristics.

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Types of wholesalers• Merchant wholesalers: These are independently owned

wholesalers who take the risk of owning the goods. They are classified on the basis of their product line. Full service wholesalers perform all the functions mentioned above. Limited service wholesalers provide controlled services to retailers and customers. For example, cash and carry business of METRO in Bangalore.

• Brokers and agents: These wholesalers do not take the ownership of goods and perform few functions. Brokers have knowledge of buyer and seller and negotiate between the two. Agent represents the company or retailer or customer on a permanent basis.

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